If you think adding new distribution channels will only result in increased sales volume, then think again. The consequence could be a spurt of channel wars.
Welcome to a world where an infinite number of distribution channels are chasing a finite number of customers. The emergence of the Internet has added considerable complexity to distribution channels by offering a variety of e-market places such as B2B auctions (PEFA.com), reverse auctions (Freemarkets.com), B2C operations (Amazon), C2B auctions (Priceline.com), and C2C formats (Ebay.com).
As a result, the various types of distribution channels available in industries such as airlines, financial services, music industry, publishing, and telecommunication services are exploding. And manufacturers who took pride in the integrity of their distribution channels with specific channels reaching specific customer segments are suddenly facing a dizzying array of choices.
The addition of new distribution channels brings with it the potential for additional sales volume at the cost of greater channel conflict. A new channel, regardless of whether it is the Internet, an emerging low cost indirect channel, or a new manufacturer sales force will increase channel conflict.
Channel conflict occurs because now there is another type of distribution channel that is perceived by the existing channels to be chasing after the same customers with the same brand.
The fear of conflict with existing channels can paralyse a company. But on the other hand much of what channel members call channel conflict is healthy channel competition. Therefore the objective of conflict management should not be to eliminate channel conflict but rather manage it so that it does not escalate to destructive levels.
From the manufacturer's perspective, channel conflict becomes destructive when the existing distribution channels react to channel migration by reducing support or shelf space for the manufacturer.
For example, when Estée Lauder set up a website to sell its Clinique and Bobbi Brown brands, the department store Dayton Hudson reduced space on Estée Lauder products. In extreme cases, an existing distributor may drop the brand as happened when Levi's began expanding its distribution. Gap decided to stop stocking Levis and concentrate on their own Gap brands.
Channel conflict becomes particularly destructive when parties take actions that hurt themselves in order to hurt the other party. For example, in 2002, Albert Heijn, the largest Dutch supermarket chain, boycotted some Unilever brands for sometime in order to retaliate against the manufacturer.
While this was resolved quickly, it was an action that could have potentially hurt both parties. Albert Heijn would have lost some brands such as Bertoli mayonnaise and Cif cleaning products that have very high brand loyalty amongst Dutch consumers.
As described below, several channel conflict management strategies exist, none of which is a panacea, but the judicious use of them can help avoid destructive conflict. These are part of the arsenal of any multi-channel marketer.
Clear segmentation: The rationale for having multiple types of channels should always be built on a clear end user segmentation strategy. When the convenience store complains to the manufacturer about the prices at which Wal-Mart is selling their products, it has to be explained that there is no way that a convenience store can compete with Wal-Mart on prices for the price seeking customer.
Instead the convenience store has to compete on saving the consumer time vis-à-vis travel, shopping and transaction processing, all at a reasonable price premium.
They serve two different segments and each should be encouraged to specialise on its target segment. Of course, the brand owner should ensure that the number of distribution points that they have within a particular type of distribution channel is balanced against the size of the segment that the channel reaches.
Dedicated products: Many designers who have pushed for sales through outlet stores have managed the conflict with their existing retailers by developing special products for these outlet stores.
Similarly, many luxury brand companies, like Camus Cognac and Guylian chocolates, offer special pack sizes and products that are attractive to travellers at duty-free airports in order to minimise the conflict with their regular high street retailers.
On the Internet, manufacturers can offer those SKUs which retailers are usually not willing to carry. At the extreme, some manufacturers dedicate different brands to different channels, sometimes referred to as channel brands.
Expanding sales: Having a new 'hit' product helps facilitate channel migration. Goodyear managed the migration to the mass merchandisers with only a reasonable amount of conflict by simultaneously restricting the distribution of its new Aquatred tyre to the independent dealers.
This allowed the independent dealer to protect their profit-ability and sales volume through the higher margin, higher value, Aquatred tyre. It is easier to expand channels when revenues are growing as existing dealers are less likely to see absolute declines in sales and profits.
Dual compensation and role differentiation: Some manufacturers agree to compensate the existing channels for sales through the new channel. While it may be perceived as just buying off the support of the existing channels for the channel migration, it can be useful if the existing distribution is given a role to perform in support of the new channel.
For example, when Allstate started selling insurance directly off the Web, they agreed to pay agents 2% commission if they provided face-to-face service to customers who get their quotes off the web. However, since this was lower than the 10% commission that agents typically received for offline transactions, many agents did not like it.
Yet, it does help lower the negative backlash. Using the existing channel partner can be a useful complement.
Equitable treatment: Some retailers will be upset that the prices at which they purchase from the manufacturer are higher than those charged to other retailers or the direct sales force. There is often the feeling that the manufacturer is favoring other channels at their expense.
While one may never fully be able to overcome these concerns, the best antidote is to treat channels equitably and in a transparent manner. If the manufacturer's prices differ across channels, it should be based on the functions that the particular channel member performs.
So, yes, Tesco and Wal-Mart receive lower prices, but it is because they engage in practices (buying large quantities, not demanding in-store help and promotions) that lower the manufacturer's cost to serve them.
The temptation for manufacturers is always to expand the number of distribution points as it usually results in an immediate increase in sales. However, having too many channels chase too few consumers results in channels dropping the level of support to the brand.
In the long run, this can have a deleterious impact on sales as well as brand image. On the other hand changing customer preferences modify industry structures. Traditional industry leaders have frequently neglected the fastest growing new distribution channels.
A delicate balance must be maintained between moving too quickly and unleashing destructive channel conflict versus clinging too long to declining distribution networks.
The author, a PhD from Northwestern University, is currently the Professor of Marketing, Director of Centre for Marketing, and Co-Director for Aditya V Birla India Centre at the London Business School.
Published with the kind permission of The Smart Manager, India's first world class management magazine, available bi-monthly.